Cavco Industries Inc (CVCO) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the First Quarter Fiscal Year 2021 Cavco Industries, Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to one of your speakers today, Mr. Mark Fusler, Director of Financial Reporting and Investor Relations. Sir, please go ahead.

Yes, good day. And thank you for joining us for Cavco Industries First Quarter Fiscal Year 2021 Earnings Conference Call. During this call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Dan Urness, Executive Vice President and Chief Financial Officer; and Paul Bigbee, Chief Accounting Officer.

Before we begin, we'd like to remind you that the comments made during this conference call by management may contain forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995, including statements of expectations or assumptions about Cavco's financial and operational performance, revenues, earnings per share, cash flow or use, cost savings, operational efficiencies, current or future volatility in the credit markets or future market conditions. All forward-looking statements involve risks and uncertainties, which could affect Cavco's actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Cavco.

I encourage you to review Cavco's filings with the Securities and Exchange Commission, including, without limitation, the company's most recent forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Some factors that may affect the company's results include, but are not limited to, the impacts of local or national emergencies, including the COVID-19 pandemic and such impacts from state and federal regulatory action that restricts our ability to operate our business in the ordinary course and impacts our customer demand and the availability of financing for our products; our supply chain and the availability of raw materials for the manufacture of our products; the availability of labor and the health and safety of our workforce; our liquidity and access to capital markets; the risk of litigation or regulatory action; potential reputational damage that Cavco may suffer as a result of matters under inquiry; adverse industry conditions; our involvement in vertically integrated lines of business, including manufactured housing, consumer finance, commercial finance and insurance; market forces and housing demand fluctuations; our business and operations being concentrated in certain geographic regions; loss of any of our executive officers; additional federal government shutdowns; and the regulations affecting manufactured housing.

This conference call also contains time-sensitive information that is only accurate as of the date of this live broadcast, Friday, July 31, 2020. Cavco undertakes no obligation to revise or update any forward-looking statements, whether written or oral, to reflect events or circumstances after the date of the conference call, except as required by law.

So now I'd like to turn the call over to Bill Boor, President and Chief Executive Officer. Bill?

Welcome, everyone. Thank you for taking the time with us today. It would be great to have a simple straightforward summation of the market and operations this quarter. And I'm sure you all understand that it just wasn't a kind of quarter. Any general statement about the quarter would fail to capture the fluidity of both our market environment and our operations.

Having said that, and considering the disruption and challenges over the past months, we're proud to report on what we feel is a very strong quarter for Cavco. Of course, the quarter began as we were very quickly approaching the initial peak of disruption. Local authorities were putting directives in place, and we were working hard simply to understand whether we were considered an essential service, and therefore, even had the option to operate.

For our office-based operations, we were quickly moving to a work-from-home approach. We covered much of that early part of the quarter during our year-end comments in May when we explained it that we quickly resolved to only operate if we could do so safely, meaning while adhering to the health authority guidelines.

From the beginning, we have been fully committed to safely operate for our employees, for independent dealers that rely on us and for the homebuyers. In those early April days, it wasn't clear that there would even be any orders. But if there were, we wanted to be there to provide homes because we believe what we do: produce; sell; fund; and insure people's homes, is very essential work.

And again, we were unsure whether there would be sufficient demand to operate and as has been communicated previously, orders did initially drop by approximately 30% in April. What's been really remarkable over the past months is how strongly demand bounced back and eventually exceeded pre-COVID and even year-over-year levels. The general housing recovery has been widely reported, and as seen in the June seamlessly adjusted annual rate of new home sales, which was the highest since 2007 and up almost 7% year-over-year. It's also seen in our orders, which at quarter end, were above last year's levels.

So rather than the concerns at the beginning of April that orders would drop and stay down, we're now managing the opposite dynamic, where our manufacturing operations have been unable to keep pace with demand, and backlogs are increasing above where we would ideally like them to be.

Manufacturing continues to be a day-to-day dynamic. All of our plants have had challenges with absenteeism, a lack of job applicants and supply disruptions. Just as the pandemic hotspots have moved and changed the environment and our plants evolves and plants that struggled 1 week stabilized the next and vice versa. Standing back from that detail, we ended the quarter operating at about 70% utilization compared to approximately 80% a year ago.

I want to pause and take a moment to really recognize the commitment and the fortitude of our production coworkers, who have been showing up every day despite being understaffed, being anxious about the pandemic and, frankly, being uncomfortable due to the need to observe health guidelines, most notably, face coverings in the summer heat. We're asking a lot, and the folks that show up every day really deserve our appreciation.

I would expect manufactured housing industry shipments to reflect similar operating challenges across the industry. In May, the seasonally adjusted annual rate of HUD shipments was more than 20% lower than the very strong January and February numbers. I expect shipments will continue to be relatively low.

People need to understand this will be more of a reflection of the industry's production challenges than the demand for our products. And labor is the overriding issue. We believe the federal unemployment insurance subsidy has hampered our ability to staff and to run at higher levels, and has contributed to our suppliers' issues as well.

The first quarter really demonstrated 2 key takeaways: first, I'm not sure that the thesis about an acute need for affordable housing could have been put to a harder test. The need for affordable housing is realized and demonstrated in the quick and strong recovery of order rates. Cavco has the opportunity to grow, and we are committed to doing so in order to positively impact the affordable housing issues facing our country. Second, our company has demonstrated the ability to generate cash even during a sudden and severe disruption. Cavco is still looking forward. We're able to do so partly because of our balance sheet, and demonstrated ability to remain cash flow positive and partly because of the confidence we have in our coworkers across our operations, who are so impressively rising to the COVID-19 challenge.

There's still very real risk looking forward. The demand bounce back would not have been as strong, were it not for very low interest rates. While there's a large need for housing, demand can and will be suspended if rates become prohibitive for many buyers.

Similarly, while many people who were looking to buy in March continued through with their plans, sustained demand requires the next group of buyers to fill in behind them. The current level of demand can't persist through time without improvements in employment and consumer confidence. Overall, we feel that Cavco has performed quite well despite the disruption. This is demonstrated by our strong cash generation in the quarter. We do recognize the cash balance is growing, and I know there will be questions about our allocation strategy.

Let me start that discussion here by saying that, primarily, we are still very positive about our growth opportunities, and we will be investing in that growth, whether it's continued investment in our existing plants, acquisitions or new market opportunities.

We've discussed increasing our home-only lending, and that is a strategy we intend to pursue. Very recently, the market has become increasingly competitive, so the pace of our home-only expansion will be driven by our measured underwriting standards relative to the competition. To be more direct, to the extent the lenders get more aggressive with their underwriting, it will likely slow our investment pace. But we are able and intending to grow in home-only lending, and we have the proven origination and servicing platform in place to do it successfully. The bottom line message is that current conditions have not decreased our interest in growth opportunities.

And with that, I'll turn it over to Dan Urness to review the financial results.

Thanks, Bill, and good day, everybody. Today, I'll review the company's financial results, and then turn it over to Paul Bigbee, Cavco's Chief Accounting Officer, to review the balance sheet.

Net revenue for the first quarter of fiscal year 2021 rounds to $255 million, and that's down 3.5% compared to $264 million during the first fiscal quarter last year. Within the factory-built housing segment, net revenue decreased 4.3% to $238 million from $249 million in the prior year quarter. The reduction was primarily from a 12% decline in units sold.

Home production declined from high employee absenteeism, limited new hire availability, supplier disruption and operational challenges generally presented by COVID-19, which included plant down days in complying with the related health guidelines.

Unit sales declines were partially mitigated, though, by homes sold from the Destiny Homes operation, which was acquired less than a year ago. The revenue decline was also partially offset by higher home selling prices overall, from a larger proportion of the home sales by company-owned retail stores in the sales mix this quarter.

Financial services segment net revenue increased 9.2% to $16.7 million, from $15.3 million in last year's quarter, mainly the result of a $1 million unrealized gain on equity investments in the insurance subsidiaries portfolio, while the prior period had negligible unrealized gains. We also increased home loan sales volume, and placed more insurance policies compared to the prior year quarter.

Consolidated gross profit in the first fiscal quarter, as a percentage of net revenue, was 21.7%, down from 22.8% in the same period last year. The decline is mainly the result of lower home sales related to COVID-19. As noted in our press release, while order rates are strong, the operational challenges of COVID-19 led to declines in home production volume and profitability.

A more recent development that is worth mentioning here, while we're discussing homebuilding gross profit, is the rapid increase in lumber and OSB prices. In the short term, we expect to see some gross margin pressure from rapidly increasing lumber prices. As we naturally try to do, we are counteracting with material surcharge pricing on our homes, but the speed at which lumber prices have increased may cause some margin compression as we work through the extended home order backlogs in our factories.

Moving to the financial services segment. Gross profit was negatively impacted by $1.1 million in higher weather-related claims volume compared to the same period in the prior year. Although this was more than offset by $1 million of unrealized gains in the entity's equity portfolio and the general strength of the financial operations.

Selling, general and administrative expenses for the fiscal year -- fiscal 2021 first quarter, as a percentage of net revenue, was 13.9% compared to 13.4% during the same quarter last year. Net expenses related to the SEC inquiry were lower in the current quarter of approximately $100,000 compared to last year's $800,000 cost. But that is largely because we received an insurance recovery of approximately $500,000 this quarter.

Stepping aside for a moment, regarding the SEC investigation, we don't have any further updates on this matter other than to remind you that we continue to cooperate with the SEC inquiry that is ongoing.

Other income net this quarter was approximately $1 million lower than last year's first fiscal quarter. The decline was primarily from a $900,000 reduction in interest income earned on cash and commercial loan receivables, given the reduced interest rates. While it had little comparative effect, it is also worth mentioning that the current quarter includes unrealized gains of $1 million on corporate equity investments, only slightly higher than $900,000 in the prior year quarter.

The effective income tax rate was 23.1% for the first fiscal quarter compared to 22.2% in the same period last year, as the current quarter included fewer tax benefits from stock option exercises versus last year.

Net income was $16.7 million, down 21.6% compared to net income of $21.3 million in the same quarter of the prior year. Net income per diluted share this quarter was $1.80 versus $2.31 in last year's first fiscal quarter.

And with that, I will turn it over to Paul to cover our balance sheet.

Thanks, Dan. Good day, everybody. Today, I'll be going through the changes in the balance sheet from June 27, 2020, compared to March 28, 2020.

The cash balance was $270.5 million, up $28.7 million from 3 months earlier. The cash increase is primarily related to net income of approximately $17 million as well as cash from changes in working capital, including lower finished goods inventory and prepaid balances, collections on outstanding accounts receivable and lower net commercial lending activity. This was partially offset by greater consumer loan originations over sales.

The current portion of consumer loans increased from a greater number of loans classified as held for sale, the result of loan sale timing. Inventories decreased, as more finished goods units on location -- at our retail locations were sold, mainly from production challenges at our manufacturing facilities previously discussed. Prepaid and other assets were lower primarily from the amortization of additional director and officer insurance premiums as well as lower net prepaid income taxes.

Our operating lease right-of-use assets and related liabilities increased from a lease extension at one of our manufacturing facilities we entered into in Q1. And accounts payable and accrued expenses and other current liabilities increased from the timing of payments received on service of consumer loans to be remitted to third-parties. Lastly, stockholders' equity is approximately $624 million as of June 27, 2020, up approximately $16.4 million from March 28, 2020's balance.

And with that, I'll pass it back to Bill.

Thank you, Paul. Michelle, let's turn it over for questions.

(Operator Instructions) Our first question comes from the line of Daniel Moore with CJS Securities.

Bill, Dan, I'll start with, I guess, capacity utilization. We talk a lot about it. I'm just wondering, given current labor constraints, kind of how meaningful that number is? That's kind of a philosophical question. But more specifically, over the next, let's say, 6 months, you seemed to be running close to full out. What is your actual capacity? And how close are we running to that as we exited the quarter or as we enter the second quarter?

Yes. I don't -- I mean, we have got to go back and forth a little bit to make sure we're addressing your question about the philosophical aspect of it. We, typically, for many quarters, have been running 80%, plus or minus, a little bit. And we've been talking about labor being really the governor on that. And so when we convey that we finished this past quarter at 70%, it's just kind of expressing it that we're that much more constrained by labor. So we're running about, call it, 90% as many units as we were before the COVID issues kind of hit us with absenteeism and plant shutdowns.

So maybe using capacity utilization, I don't know if that's the way that resonates the best with you, but we're kind of trying to indicate that we're about 90% of what our pre-COVID level of productivity is. And of course, we're making everything we can in an environment where there are very strong orders.

Indeed, I guess, my question is, how much additional capacity do you think you'll be able to add? How quickly can we get back to those prior growth rates -- prior production rates? And can we add additional capacity beyond that, given the current order rates and current demand environment?

Yes. We're always investing and looking for investment opportunities in our system from a physical capacity perspective, and we're working on some projects in given plants in that regard. And I hate to sound like a broken record, but the question about how quickly we can recover? We feel it's really a question about getting job applicants and building the strength of our teams, which has really taken a step backwards over the last couple of months. So it's kind of hard to predict that.

I don't want to belabor the issue because we're trying to do everything that we can just blocking and tackling our plants to be as productive as possible and to hire. But we have had trouble getting good applicants, which we're actually hopeful is a function of the $600 a week subsidy that the federal government has given to unemployment. I'm not trying to point and blame too much on that, but it's a reality that, that's affected what we've seen with job applicants. And since there's a lot of unknown about what's going to be done since that expires, I guess, today, right around now, there's a lot of question about whether that's re-upped? If it is, it's going to be a continued difficult issue for us. And if it's not, and that causes people to get ready to get back to work, I think we'll be able to make gains a lot quicker. So sorry for the -- not precised quantified answer, but you're touching on the biggest unknown we've got right now for our business.

That's helpful in terms of color. As far as retail demand, obviously, it bounced back really quickly as you described. What have your dealers seen in terms of traffic as we move from June into July? That's one.

And then two, I think, 90 days ago, the community business was more sitting on their hands. Have you seen community developers coming back more significantly in terms of demand as well?

Yes. Traffic, as we ended the quarter, was really stronger than -- we're seeing more selling opportunities, which is kind of the -- what we're trying to use traffic to convey. We're seeing more this year as the quarter ended than we saw last year at the same time. The composition of that has shifted pretty significantly. A lot less walk-ins and a lot more phone up type opportunities, which -- and I'm speaking about our owned retail, for the most part, it really speaks to how quickly the folks in that business saw what was coming when they started, and kind of shifted their focus about how to generate leads, and they did a remarkable job with that.

So we had less walk-ins, more phone up type of opportunities, net more opportunities than a year ago. And as you've heard from us and others, the conversion rate of that traffic into deposits was actually meaningfully higher than it was in past periods. So the people that were coming in -- coming to us as leads, we're converting into deposits at a much higher rate. That's pretty much continued. I mean, it just kind of mirrors you want to start at total homebuilding. As I mentioned in my comments, it mirrors what you're seeing in the stats around the general housing market. And it mirrors what I think all manufactured housing companies are seeing as far as their order rates.

I would just add, Dan, that on the community side, we're starting to see some more orders there. I think that just in connection with housing strength, in general, I think community strength has been there as well. And so the owners of the communities are, I think, still weighing collections, making sure they're comfortable. But we have seen some release of some of those prior orders that were put on hold. And we're hoping that, that trend continues, and that we continue to see that. But that will be even additive or incremental to the strength in the retail side that Bill's talking about.

It's -- I don't think it's been like turning on a switch with the communities. They've kind of -- it's incremental orders. It's incremental releases of orders they already had in the systems. So I don't think we're going to see just at a point in time, the large community operators suddenly say, hey, release them all, and let's go. But we have, as Dan said, we've seen that start to pick up.

Got it. Understood. Switching gears. In terms of financing, I believe you had indicated that you were seeing spreads tighten a bit as we went into the summer months. Maybe talk about Chattel, one, and land/home, two, kind of versus each other and then versus traditional stick-built, have you seen spreads continue to tighten? And any quantification?

At Chattel, in particular, I think, has been notable because it's -- that's an interest rate that typically doesn't really correlate to, for example, mortgage rates. It's kind of -- it tends to be pretty stable. And those rates have come down significantly. I mean, we've heard different numbers because it's a moving target to try to put your finger on it, but where they might, historically, have been 7.5% to 8%, we've heard of Chattel lending rates down in the 4s. And so that's pretty remarkable.

And that's not -- again, that's not really correlated to the other part of your question, which is land/home, where you know that is more correlated to kind of nationally publicized mortgage rates. And those rates have been very low as well. So it's been a very -- depending on your perspective, it's been a very helpful environment for the orders that we've seen, and it's also been interestingly competitive from a Chattel lending perspective. Have something to add?

Got it. And maybe one more, and I'll jump out. But staying with financial services. Have you seen claims volumes continue to tick higher slipping into the first part of this quarter from what we saw last?

Yes. Happy to, Dan. And we've seen some activity in weather. We've had that hurricane that came through the Gulf and the southern part of Texas. It really didn't -- we don't think caused a large impact to us based on where we have our concentrations, which we watch closely.

Just as a reminder, we -- in Texas and on the Gulf, we don't write in the ZIP codes write on the Gulf. But inland, when storms come inland, we can get some impact from that. But this one went into an area and through an area that we don't expect to see a lot of impact.

It's getting to be hurricane season, so we'll keep an eye on those. As a reminder, we don't write any insurance policies in Florida. That's seeing some activity right now. Our policies are primarily in Texas, and then secondarily, in Arizona and New Mexico.

And our next question comes from the line of Greg Palm with Craig-Hallum Capital.

This is actually Danny Eggerichs on for Greg today. I know you said kind of 30% drop in order rates in April. Is there any way you could quantify kind of the monthly cadence in May and June? And maybe any additional color on July would be helpful as well?

The -- yes, we didn't necessarily quantify it because it's a fairly fluid scenario. But needless to say, we did want to make a point that order rates did jump substantially from that low and kind of progressively got better throughout the quarter and continue to be strong. So while we don't have specific numbers for each of those months, it's -- needless to say, we're, at this point, getting more orders than we can build. And back to our kind of larger point, production is the topic right now, because we think that we've got opportunities there to build more homes, to convert more of those orders into revenue instead of building backlog, although right now, we're building backlog.

Got it. And then, I guess, just in terms of the bounce back in demand. Is there any way you could try to kind of weight where that demand strength is coming from? Whether it's urban or rural migration or the financing or just display in desire for homeownership? Like what are you seeing there?

Yes. I mean I don't know that -- I don't know we have tremendous data on it, but I guess I could speak from my perspective. I think the biggest driver, in my opinion, is the interest rates and the really incredible pent-up demand that overall housing has created over a number of years with starts lagging household formation and need for new homes.

So I think it's -- as I said in my comments, I think it's been just a remarkable test of that thesis that a lot of people are out there that need homes. And when interest rates are like this, they've kind of powered right through the COVID thing it seems.

So we're conscious in thinking about things like trends that have been initiated by the COVID-19 situation, and whether we're going to see a flight from urban environments to more rural environments. I think we'd really be speculating and don't have a lot of data that we can point to that says we can see that right now. So we're really not disclaiming that, but don't have a good feel for the magnitude of it at this point. It's just a situation where interest rates are really attractive and people need homes, and they're out buying them.

And maybe just one note on that I'd add is that even though we've been in a period here where we've had the unemployment benefits coming through, those benefits aren't directly impacting home sales because to get a loan, somebody has to have a job. And so they need that to qualify. Those unemployment benefits, obviously, helped the general economy, but it's not a direct benefit.

Yes, that makes sense. And then, I guess, just jumping back to labor real quick. In terms of, I guess, you guys compare to the industry where you really saw a lack of shutdowns within your own facilities where, I guess, a lot of industry members were shutting down plants at a higher rate earlier in the quarter. Do you have any sense of where you may be able to retain labor better comparable to the rest of the industry? Or how do you see that?

Yes. I think it was a good thing for -- directionally for us to be able to keep running. And when this started, none of us knew -- it was kind of interesting for me thinking about this call in preparation, trying to put my mind back to that point in time. I mean, we didn't know where this was heading, right? But our commitment was to keep running because we wanted to keep paychecks flowing to our employees, and we wanted to keep homes at -- for the lifeblood of our independent dealers flowing to the extent they were needed. And to your question, I think that was productive in trying to retain our people for sure. We've had pretty consistent employment for people. We've also done a lot with our policies during this period of time to work with our folks when they had to be absent. Whether it was because they were having symptoms or they were high-risk for some other reason or needed to be a caretaker, we've tried very hard and had policies in place to continue paying them.

So I feel really good looking back on the last several months about our approach and have to believe that it's helped us incrementally with retention. But it's still a battle.

(Operator Instructions) Our next question comes from the line of Jay McCanless with Wedbush.

The first one I wanted to ask, when I think about the active backlog, presumably, that's weighted more towards the independents. Does that give you any little better gross margin benefit than maybe having more single section homes in there? Just trying to figure out if there's going to be some positive offsets to that higher lumber cost you discussed in the prepared commentary.

Well I guess I'm not sure how I can answer that. This is Dan. I'll take a stab at it and see if I can help you with that a little bit. And that's -- our backlog includes, obviously, independent and company-owned store and community and developer orders. And for any given floor plan, we don't have varied amounts that we charge. So as far as the benefit there goes, there's no preference between, say, independents and other avenues or distribution channels.

With respect to the mix of singles and doubles, we'll always look at what the best margin opportunities are for us, and mix that with the demand in the marketplace and try to find the sweet spot there.

So yes, we'll be taking all those things into account when we're looking. Because for every home we build, we want to really -- and as a company, we've always focused on our margin contribution. And with respect to specifics, hard to get into more details than that, but let me know if that's helpful.

Yes, absolutely. I guess, the second question I had is knowing that lumber is moving higher, what are you seeing from the other commodities right now? Any other thing that we need to be worried about there?

I think that lumbers is where the focus is right now, certainly, and on the lumber-related products. We mentioned OSB on the call. In other areas, it's been relatively stable. I think that we'll continue to keep an eye on it. Doors are up.

Maybe the next largest topic is just availability. And that continues to be something we're paying close attention to, making sure that we can have access to all the materials we need, whether it's component parts being made in other countries. Most of our supply is domestic, of course, that, even within domestic regions, these issues we're talking about with production and production strength and the ability to produce to the demand are issues that our suppliers are having as well and the suppliers of the industry are having. So we have done, I think, a very good job in our company and our people have done fantastically with managing through supply constraints. But we still have to continue to keep an eye on those issues.

Is it more the -- to the stick builders I'm talking about, trouble getting appliances early on in the COVID. It was trouble getting electrical boxes and electrical equipment. I mean, is it smaller things like that? Or is it larger segments or pieces of the homes?

Yes. I think for us, it started out with windows was the first thing we struggled with, and that was -- if my memory is right, kind of back in the April and May time frame. And then it kind of transitioned to a variety of appliances that our folks had to kind of scurry around. And now -- not to minimize the ongoing appliance concerns, it's transitioned to this lumber and OSB, where the costs are shooting up. But also it's gotten to the point where, at times, we're fighting to try to get some of it.

So it's not only a cost issue, it's a supply issue.

And just as Dan said, I think it's a consistent message that those folks are trying to operate in difficult manufacturing conditions as well. So you weren't asking, it's my speculation about markets, like lumber and OSB, is that the price is shooting up because of their struggles, manufacturing and having some facilities that have been shut down.

So the price is going to go up and try to bring some of that capacity back in, but they need workers too. And we're probably going to be in for a bumpy ride. I don't know that I believe it's going to be just sustained at a high level, but I think it's going to be bumpy for us for a while. And our plants are doing a good job in kind of keeping their eye on that, manage the supply issues. But also keeping an eye on pricing to try to make sure we're protecting our margins. I think Dan commented about that earlier, there can be a lag in that sometimes getting the prices through.

Understood. And then the last question is for you, Bill. If you don't mind, just elaborate a little bit more for people, like myself, who are newer to the story? What have been your thoughts in the past in terms of doing more home-only lending from Cavco? And what are the conditions that you would want to see in the market to get more aggressive in that space?

Yes. We -- I mean, in one sense, I guess, my comments earlier were indicating that we are intending to expand our lending in home-only. It's always -- that intention right now is kind of an interesting, right, because we have seen pretty aggressive moves by other lenders. And that's what's driving the rates down. And it's affected their underwriting as well.

So we're not going to chase it. But over time, we intend to grow our origination and our servicing of Chattel loan. That's all embroiled with a backdrop of the lack of a securitization market. But part of our strategy there is that we've got the balance sheet to do a bit of it. And we'd like to be able to develop more investor relations from the perspective of buyers of those loans and where -- we need to have a base in order to do that. We need to be able to feed those customer relationships from the buyers.

And we're hopeful that this industry is going to get to a point where we're back to securitizations and we want to be able to participate in that. So for all those reasons, including the available balance sheet, our intention is to grow our chattel lending.

And our next question is a follow-up question from the line of Daniel Moore with CJS Securities.

Maybe 1 or 2 quick follow-ups. You mentioned backlog is higher than where you'd want them to be. Are we -- in terms of number of weeks or overall backlog, are we back near or above kind of where we were last year when backlogs or peak 3-year plus ago? Any meaningful concerns or risks of you or your dealer customers losing orders if they continue to grow?

I'll just jump in and, mention that we're right now at about 8 to 9 weeks backlog, Dan. And that is up over last year. Last year, this time, we were round around 7? So yes, we've got more backlog. Again, with production being a little bit lower, that's part of the calculus there, too. But yes, it's a higher backlog than we would like to have.

Yes. Yes. So -- and your question about losing, I think you're asking also about does that higher backlog mean we're worried about losing sales? It's all relative, right? And I think most manufactured housing companies are probably seeing growing backlogs right now. So as long as we're all struggling with the same issue there, then I don't think we're necessarily losing sales. But we consider a backlog of that long to be a lost sale opportunity every day. If we can make the home, we can sell it.

So it's not where we want it to be. I mean, we've talked in the past, we prefer backlogs. If you could dial it in and just lock it, we probably want to have about 4-week backlog, say. So we're well above that level, and that's a general statement across our whole system.

Got it. And then, last, on the lending side, following up, I believe it was Jay's question, but what kind of rates of return historically would you generate and target going forward if you -- as you expand your loan portfolio? Let's dream and assume we do get back to chattel lending opening back up, what kind of rates of return or return on capital does that typically generate or has it in the past?

I can tell you the dynamic a little bit. I'm not sure I can pin point a number. When we can buy -- when we can originate and sell, the rates of return are very high. Because it's just the churn -- the speed of that churn. And so that's kind of, for us, plan A. We're not interested in long-term warehousing these kind of loans. That's not our plan A. And the comments, talk about Jay there a minute ago, the comments about our intention to expand our origination is really to expand the rate at which we originate, with the plan A being to develop more buyer opportunities and keep that churn, I guess, a quick sale.

When you do that, the rates are really good, like very high. And then the alternative is when you hold loans, which we called Plan B, then you're getting more like interest rate type return that we had mentioned. So the chattel historically has been 7 to 8. Holding those loans, you've got loss reserves and you've got some other dynamics that are pushing that around, but you're probably in that range, right? You're the other side of that rate.

Just to continue on, sorry, probably -- you probably dropped off as I'm having notes, I just -- to continue on. I guess our view is, we're going after that plan A, and we're willing to -- if that means we have to have someone on the balance sheet for a period of time, while we're developing these customer relationships, we're confident enough in developing them that, we're willing to have some of our balance sheet invested in going after those kind of sales. So sorry, I added that after you probably jumped off, Dan.

Thank you. I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Bill Boor for any further remarks.

Okay. Thank you, Michelle. Yes, just to summarize, I guess it goes without saying it's been a pretty demanding quarter. We're very proud of the company -- our company, which is filled with a lot of folks who continue to solve problems and remain very committed and flexible. And that's what the situation demands. And we're not seeing that, that's -- we don't know where the end of that is, but we've kind of proven to ourselves, we're really capable of doing it. So very proud of how our company has responded to this.

Our main challenge, as we've said quite a bit here, is to increase the manufacturing productivity and we're hopeful that the labor market will pick up and people will get back to work, which is key to what will allow us to do that. We're, certainly, encouraged by the demonstration of strong demand for our products. And we really believe in the need for affordable housing. So we try to look at the long term, even in the middle of these situations. And we're going to continue investing in our plants and in new growth opportunities as part of our commitment to providing solutions.

With that, I really want to thank everyone for all your interest in Cavco. We hope that each of you and your families are staying healthy and safe. And thanks for taking the time today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.